Friday, November 5, 2010

Kabel Deutschland - Fresenius - Bancaja

Kabel Deutschland
Event Yesterday, Kabel Deutschland made a formal request to its lenders to amend certain terms of its existing senior secured credit facilities and to extend a portion of debt maturities to March 2014. The company is seeking additional flexibility in three areas in return for a fee of 50bp: a) secured maintenance covenant set to 3.5x until maturity and removal of 0.5x covenant step-up following a major acquisition; b) increase KDG’s total net debt leverage threshold for unlimited dividend flexibility from 3.0x to 3.5x (protecting secured lenders and HY holders); c) remove current limit and required 1:1 ratio of junior and senior prepayment, providing the ability to upstream cash to repay junior debt subject only to covenant compliance.

Impact Kabel Deutschland reiterated its forecast to reduce its leverage below 4.0x EBITDA by the end of FY11, ending 31 March 2011. Hence, we view this amend and extend request as a (first) preparation to pay dividends more quickly than expected (after the AGM in October 2012). However, according to our understanding, this would also require a repayment of existing PiK loans, which limits dividend payments. That said, the amend and extend process might be followed by refinancing transactions of the PiK loans as well as of the senior bonds. 

Recommendation We reiterate our hold recommendation for the KABEGR 10.75% 2014 senior bond,
which trades close to its call price.

Event Fresenius raised its full year 2010 earnings target, on the back of the strong performance in its Kabi unit as well as Fresenius Medical Care ("FMC"). For the first nine months, Fresenius reported strong organic growth of 9%, driven by all business units and Kabi (+13%) and Vamed (+31%) in particular. Further helped by scope (+1%) and FX effects (+3%), 9M sales grew 13% to EUR 11,821mn, while EBITDA rose 17% to EUR 2,244mn. Cash-flow generation, too, was very healthy, with a solid earnings momentum and tight working capital management contributing to free operating cash flow after dividends and capex of EUR 348mn (vs. EUR 251mn). Owing to FX effects, net debt levels increased by 4% to EUR 7,955mn, but were down in constant currency terms. Leverage of 2.7x remains well within management's target range of below 3.0x by FYE 2010.

Credit profile development 

The new 2010 outlook calls for net income growth of 20% in constant currency terms (previously 10%-15%) on sales growth at the upper end of the previous target range of 7%- 9%. While all business lines are expected to contribute, the main drivers remain the company Kabi segment as well as FMC. For leverage, Fresenius targets a ratio of below 3.0x, which, barring any unforeseen (and unprecedented) slowdown in the group operating performance, obviously allows for an acceleration of M&A activity in 4Q and beyond.

Recommendation Given continuously tight spreads and increasing event risk, we maintain our sell recommendation on Fresenius issues.

Event : Bancaja (A3n/--/BBBwn) reported net profits of EUR 27mn in 3Q10. The bottom-line result was down 59% qoq and 46% yoy due to substantially lower revenues (down 53% qoq and 14% yoy), which offset the impact of substantially reduced provisioning (down 80% qoq and 30% yoy). The former was driven by lower net interest income (down 7% qoq and 19% yoy to EUR 239mn), which is in line with the market, reflecting both the reduced volume and the increased funding costs. In addition, fees & commissions also declined (down 5% qoq and 1% yoy to EUR 69). 

Other income (including equity participations), which was the strong revenue supporter in 2Q10, also declined substantially. As opex was nearly flat, this translated into a much lower risk-absorbing capacity of the P&L (pre-provision income was down 72% qoq and 27% yoy to EUR 193mn). However, Bancaja opted to release substantial amounts of specific loan-loss provisions due to the recognition of collaterals/guarantees within the implementation of the Bank of Spain's new provisioning requirements. Hence, recorded loan-loss provisions plummeted by 80% qoq and 30% yoy to EUR 104mn, although the new NPL formation amounted to EUR 418mn in 3Q10 (vs. EUR 103mn in 2Q10 and EUR 600mn in 1Q10). 

Thus, the NPL coverage declined by 12.5pp qoq to a relatively low 43%. The gross (residential) loan book declined marginally by EUR 237mn to EUR 75,499mn, while residential deposits increased by EUR 523mn or 1.15% qoq to EUR 45,837mn and public sector deposits more than tripled to EUR 4.3bn (up EUR 3bn). Thus, the overall loan-deposit ratio declined to 164% vs. 176% in 2Q10. Bancaja's core Tier-1 ratio increased by 13bp to 7.2% and the Tier-1 ratio increased by 12pp to 8.0%, both driven by internal capital generation – which is, however, not enough to prop-up the capital adequacy going forward.

Impact : Bancaja's 3Q10 results are credit neutral. However, we do not like the aggressive attitude with regard to releasing existing provisions, as we expect the bank to need them sooner or later (hence, we prefer the conservative provisioning of Banco Santander, which did not release specific provisions with the implementation of the new provisioning requirements).
Full Report and Contact: Kabel Deutschland and Fresenius

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